Murphy, Lawmakers Have Only Weeks To Make Hard Budget Choices

State Treasurer Elizabeth Maher Muoio outlined spending cuts, deferrals on Friday; three-month supplemental budget plan must be adopted next month

Gov. Phil Murphy’s administration has laid out a series of spending cuts, deferrals and other budget adjustments to offset short-term revenue losses caused by the coronavirus pandemic  But he and lawmakers still face even more difficult decisions on state spending in the future.

Thanks to their agreement to extend the state’s fiscal year to ease the pandemic’s economic hurt, Murphy and lawmakers must adopt a three-month supplemental budget plan by the end of June.

In preparation for that, the administration unveiled on Friday a stripped-down, $7.7 billion spending plan to get the state through what would have been the first quarter of fiscal year 2021 under normal conditions.

This three-month budget, which is subject to legislative approval, drops nearly $850 million in spending Murphy had proposed back in February, before the pandemic took hold across the state. In addition, Murphy has set aside a series of planned tax hikes, including his long-sought true millionaires’ tax.

Still looming after that for Murphy and legislative leaders is the adoption of a spending plan for the new, nine-month fiscal “year” 2021 that will begin in October. That task has only been made more difficult by some of the decisions that were made to balance the near-term revenue losses, including the planned spending down of surplus funds and a deferral of some major line items, including a nearly $1 billion state pension contribution.

State Treasurer Elizabeth Maher Muoio acknowledged the “significant challenges” that lie ahead during a media briefing in Trenton on Friday.

But, she said, “I have no doubt we’ll get through this, like we have many times before.”

The pace of state tax collections had actually been running ahead of projections through the first three quarters of the 2020 fiscal year (which began in July 2019), and Treasury had enough confidence in late February to upgrade the forecast for the remaining months by about $1 billion. Other revisions announced at the time called for an increasing of the state’s budget reserves and for an extra pension contribution to be made before the end of June — two measures that were considered by fiscal-policy watchdogs to be a responsible use of the state’s growing resources.

Massive loss in revenue

But New Jersey saw its first reported case of COVID-19 in early March, and by the middle of that month Murphy declared a public health state of emergency and began issuing a series of social-distancing orders, including many that severely restricted business activity. Murphy also worked with lawmakers last month to push back the traditional April filing deadline for state income taxes to July 15, as part of broader efforts to help residents struggling with serious illness or job loss.

At the same time, Murphy and lawmakers agreed to extend the end of the current fiscal “year” by three months, pushing the typical June 30 close to the end of September.

While Muoio cautioned during Friday’s briefing that the situation remains fluid, her department’s latest projections foresee revenues that were on pace to surpass $39 billion by the end of June 2020 now plummeting to about $34 billion by the end of June 2021. And Muoio warned that an additional $1 billion revenue loss could be looming later this year if there is a second wave of infections.

“Essentially, the virus is going to dictate the outcomes,” Muoio said.

Sweeney: Tough decisions ahead

Legislative leaders, who were briefed on the budget revisions earlier on Friday, seemed to take the proposed changes in stride. Some of the bad news had already been revealed last week along with April revenue figures.

“We’re going to have a lot of tough decisions to make,” said Senate President Steve Sweeney (D-Gloucester) in a phone interview on Friday.

“This year we can get through. It’s bad, but it’s doable,” Sweeney said.

“The revenue figures demonstrate the devastating and unprecedented impact of the pandemic,” said Assembly Speaker Craig Coughlin (D-Middlesex) in a statement issued by his office.

“I have received a budget report that I am currently reviewing,” Coughlin said.

To address the near-term challenge, roughly $1 billion in spending that had been frozen earlier this year is now slated to be “de-appropriated,” according to new budget documents that were provided to lawmakers and the media on Friday.

If lawmakers go along with the plan, about $135 million that had been set aside for this month’s Homestead property-tax relief will be canceled, as will $30 million in “transitional aid” for distressed municipalities. Nearly $70 million in spending on anti-opioid addiction programs will also be scrapped, as will $5 million in housing assistance for veterans.

Emptying the rainy-day fund

In addition, Treasury is planning to reach the end of September with no money left in the state’s “rainy-day” fund and just under $500 million total in other reserves as part of the proposed $7.7 billion spending plan for the extra three months that were tacked on to the end of the 2020 fiscal “year.” That marks a significant drop from the more than $1.5 billion in reserves that Murphy had been planning to have on hand for the start of FY2021.

Federal funding the state has received under the $3 trillion CARES Act that was approved by President Donald Trump and Congress in late March is helping to ease the state’s revenue crunch. That includes $1.4 billion that was sent to New Jersey Transit to help make up for its major revenue losses, easing pressure on the state budget to fill the gap.

Murphy has also scrapped planned spending increases on things like an expansion of college tuition assistance and a further increase of state aid to K-12 school districts. In fact, the rate of state aid to schools will be held flat for the time being even though Murphy had proposed a more than $330 million increase in his original budget plan for FY2021.

Moreover, a combined roughly $1 billion in state aid payments to local school districts and municipal governments will be deferred from September into October to help the budget remain in balance through the end of the extended fiscal “year,” according to the administration’s new budget plan. Also being deferred under a similar schedule is what would have been the first-quarter state pension contribution of $951 million. (A separate, $684 million pension payment remains on schedule to go out at the end of June, Treasury officials have said.)

The deferrals combined with the projected revenue losses and the potential for a second wave of the pandemic are raising concerns about the shortened 2021 fiscal year, which will begin on Oct. 1. Murphy is required to put forward a nine-month budget plan by August 25.

At this point, no public-worker layoffs or tax increases have been proposed for either the remainder of FY2020 or for FY2021.

The state Constitution does not allow the budget to operate with a deficit, so cuts or other adjustments are needed to offset mid-year losses. The shortfalls that have been caused by the pandemic now rival those faced by previous governors in the wake of the Great Recession, including a $4 billion shortfall that arose in FY2010 during the tenure of former Democratic Gov. Jon Corzine and a $2.2 billion shortfall faced in FY2011 by former Republican Gov. Chris Christie.

Both Murphy and Muoio have been calling on lawmakers to give the administration the authority to do emergency borrowing as part of New Jersey’s response to the pandemic, saying language in the state Constitution allows for strict limitations on debt issuance to be relaxed during a major emergency such as the current health crisis.

Big questions over borrowing

While no related bill has been formally introduced yet, Coughlin has promised to work with the governor on the borrowing plan and has scheduled a vote in the lower house for June 4.

For his part, Sweeney hasn’t ruled out some borrowing, but he has balked at a part of the governor’s proposal that allows for bonds to be issued with a maturity of up to 35 years. Other lawmakers have raised concerns that portions of the administration’s borrowing plan may run afoul of strict limits on deficit spending that are also written into the state Constitution.

And while the state has received more than $1 billion in federal assistance in addition to the funding that went to NJ Transit, Murphy and Muoio said much more will be needed to help the state get through the health crisis as it continues to unfold.

“We need Washington to step up with significant direct fiscal assistance,” Murphy said.

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